The U.S. beef industry is changing dramatically, and it's changing for the better, says Randy Blach, executive vice president of Cattle-Fax, a member-owned information organization that serves all cattle industry segments.
With recent feeder cattle prices hitting all-time highs, most would agree that times for American producers are pretty good, despite the drought in some regions. But there's less consensus on why prices are moving to all-time highs. Some argue that it's due to the closed border to Canada and less beef coming into the U.S. Blach says that's only part of the reason.
“Canada was the catalyst that allowed the U.S. feeding industry to get extremely current, but it's only been part of the reason prices are doing what they are now doing,” he says.
Blach says the U.S. recorded its highest beef production levels in history in 2002. This year is expected to be the second biggest beef production year.
“With the last two years of record beef supplies in the U.S., beef demand had to improve for prices to move higher. So this is mostly demand — not entirely supply — that is driving fed cattle prices,” he says.
To illustrate that point, Blach says annual U.S. consumer spending on beef has increased by $14 billion since 1998. That means every person in America is spending $40 more on beef than they were five years ago.
“That demand growth has added about $200/head to fed cattle prices,” Blach says.
That demand growth is also being passed back to the cow-calf producer. Blach says the average cow-calf producer has been profitable since 1999, and 2003 will likely mark one of the most profitable years in history for packers, feeders and cow-calf operators.
Where has that demand growth come from? Blach says producers can thank themselves.
“Each producer in the production chain has made an investment in the industry through the check-off. The dollars spent on beef research, new product development, and nutritional messages targeted at health professionals and consumers have worked. Demand growth wouldn't have happened without them,” says Blach.
Due to liquidation of the nation's cowherd during the last seven years, Cattle-Fax predicts smaller production levels for the next two to three years. That lower supply combined with stable demand should mean higher cattle prices into 2005, Blach says. But, he cautions, weather will still be a critical factor as it impacts grain prices and grazing conditions.
“We're currently in a La Niña weather pattern which can be unpredictable. We know there will be dry areas, but it's difficult to predict just where,” he says.
By 2004, Blach expects Canadian live cattle and feeder cattle less than 30 months of age will likely be coming back into the U.S. In a global economy, he says imports and exports are a fact of life. But from a trade standpoint, the U.S. industry benefits, on an annual basis, from a net trade surplus of beef, beef by-products and cattle. In 2002, it was $740 million.
He adds, “We've got to focus on producing high-quality fed beef. No one can do it like the U.S.” For instance, if choosing between importing live animals or red meat, he says, “Obviously bringing in a 300- to 350-lb. calf from Canada or Mexico and developing it offers a lot more value-added opportunities for our industry and the chance to put more dollars in U.S. producers' hands.”
In preparing for the future, Blach cautions that an average producer in a commodity business won't make any money. That's a basic rule that's true in all agricultural commodities — be it beef, hogs or grain, he says.
Blach points out that there's about a $120/head difference in net returns between the top one-third and bottom one-third of cow-calf producers in the U.S. It's a difference that hinges on annual cow cost, production performance in the growing and finishing phase and on rail, and the expression of superior genetics.
He says, “First you need to find out how your cattle perform and where they fit. Then, it's often minor changes that have to be made to capture some of that profit, be it an extra $20 or $50/head.”
Kindra Gordon is a freelance writer based in Spearfish, SD, and a former BEEF managing editor.
Where Will The Cows Be?
Looking ahead, Cattle-Fax executive vice president Randy Blach predicts there will be an abundance of opportunities for cow-calf producers in the Northern and Southern Plains.
“Fifty-two percent of the nation's cows are already in the center of the U.S., and we're going to end up with more cows there in the next 10-20 years,” he says.
Blach reports that currently only 10% of the nation's cows are in the far West. Over the next two decades, he expects that number to dwindle due to major issues with public lands and urban development.
Currently, 25% of the country's cows are in the Southeast, but only about 1% are finished there.
“Having the feeding and packing industries in the central U.S. will also help bolster that area as a cow-calf producing region,” says Blach.
More Consolidation, Too
Blach also anticipates a continuing movement toward fewer, but larger, cow-calf operations. The number of beef cow farms has shrunk from a high of 1.2 million in the 1960s to about 740,000 in 2002, he reports, but says, “That trend is the same in all industries, as we become more efficient and more competitive consolidation occurs.”
Currently, 51% of the country's cows are in herds that are smaller than 100 head. One-third of the nation's cows are in herds of 200 to 500 head — and that's moving toward 40%, according to Blach.
“There's already more consolidation in the cow-calf sector than most people think, and that will increase as more branded programs evolve,” he says.
Feed yards and retailers are also consolidating. Blach says the top 25 feeding companies and top five retailers now control 40% of the fed cattle and food sales, respectively. By 2005, it's anticipated that each will have a 50% market share of their respective segments.
He also predicts that some of the consolidation may lead to opportunities for long-term price contracts for producers.
“Such contracts may be a way for cow-calf producers and retailers to ensure a consistent return and supply, as well as allow retailers or food service operators to have a more stable menu price,” says Blach.
That said, Blach reiterates that this is an exciting time in the industry.
“The last five years are the first time in more than 20 years that we've experienced demand growth for beef products, as well as profitability in all cattle segments, and we're just getting started,” Blach says. “The new beef product development underway offers several opportunities to add even more convenience, consistency and value to our product and grow demand even further.”